Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments

34 Pages Posted: 24 Jul 2017

See all articles by James Frederick Cust

James Frederick Cust

World Bank

David Mihalyi

Natural Resource Governance Institute (NRGI)

Date Written: July 10, 2017

Abstract

Oil discoveries can constitute a major positive and exogenous shock to economic activity, but the resource curse hypothesis would suggest they might also be detrimental to growth over the long run. This paper utilizes a new methodology for estimating growth underperformance to examine the extent to which discoveries depress the growth path of a country following a discovery and prior to production starting. The study finds causal evidence of a significant negative effect on short-run growth and growth relative to counterfactual forecast growth in countries with weak institutions, creating growth disappointments prior to private and public resource windfalls. This effect is termed the presource curse. For a giant oil or gas discovery in 1988-2010, the study estimates an average growth disappointment effect of 0.83 percentage points, measured as the average annual gap between forecast and actual growth over the five years following a discovery. Further, the estimated effect varies by the size of the discovery, increasing to a 1.77 percentage points gap in the case of super giant discoveries. The estimated effect is inversely related to the quality of political institutions, and driven by countries with lower institutional quality at the time of the discovery, consistent with the similar long-run results documented in the resource curse literature. For countries with below-threshold institutional quality, the growth disappointment effect is larger, measured as 1.35 percentage points in annual terms. There is no measured growth disappointment effect for countries with strong institutions. Using the synthetic control method, we confirm our findings for a selection of countries above and below the institutional quality threshold. The findings suggest that studies of the resource curse that focus only on the effects of resource exploitation or examine only long-run growth effects may overlook important short-run growth disappointments following discoveries, and the way countries respond to news shocks.

Keywords: Economic Growth, Public Finance Decentralization and Poverty Reduction, Macro-Fiscal Policy, Energy and Natural Resources, Public Sector Economics, Economic Theory & Research, Economic Adjustment and Lending, Industrial Economics, Coastal and Marine Resources

Suggested Citation

Cust, James Frederick and Mihalyi, David, Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments (July 10, 2017). World Bank Policy Research Working Paper No. 8140, Available at SSRN: https://ssrn.com/abstract=3006214

James Frederick Cust (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

David Mihalyi

Natural Resource Governance Institute (NRGI) ( email )

80 Broad Street
New York, NY 10004
United States

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